NEW YORK (Reuters) - Canadian equipment finance company Element Financial Corp (EFN.TO) is in exclusive talks to buy PHH Corp’s (PHH.N) fleet leasing business for about $1.35 billion in cash, in a deal structured to include significant tax benefits, a source familiar with the matter said on Wednesday.

PHH said in February it was considering separating or selling its mortgage and auto fleet leasing businesses.

The source said a deal with Element for the fleet leasing business, PHH Arval, could come within the next two weeks. But the source added that the two sides had not yet finalized the deal and some details, including customer issues, needed to be worked out.

PHH’s shares rose more than 10 percent to $23.35 after the news, while Element Financial was trading up 1.8 percent at $13.45.

Earlier this month, PHH Chief Executive Glen Messina told analysts on a conference call after announcing earnings that the company had engaged in detailed discussions with several parties since announcing its review. He said the company expected to reach a decision by the end of this quarter.

Representatives for PHH and Element declined to comment.

Divesting the unit would help improve the balance sheet of PHH, which has a market capitalization of just over $1.2 billion and more than $5 billion in debt.

Last September, activist investor Orange Capital LLC urged the company to hire a financial adviser to sell or float its fleet management services and create a finance vehicle to own a stake in its mortgage servicing and origination business.

Element, an upstart Canadian company that provides financing for industrial, aerospace and automotive equipment leasing, is trying to exploit a sector largely abandoned by big banks after the financial crisis. It plans to use the PHH business as a platform for future acquisitions, the source said.

In a January interview with Reuters, Element Chief Executive Steven Hudson said the company plans to seek acquisitions in the United States and Europe. He predicted the company could have C$9 billion to C$11 billion of assets in a few years, up from C$3.3 billion at the end of last year.

“In the vendor finance market that’ll make you in the top 3 and that’s where we want to play,” Hudson said.

PHH’s fleet leasing business, which provides auto lease financing and services to government agencies and corporate clients, including Fortune 100 companies, has about $3.6 billion of fleet leases, the source said. Analysts initially expected the business to fetch around $700 million.

The source said the transaction is being structured using a step-up tax basis, which allows for the unit to be valued at a higher market value than the price at which it was originally acquired.

That reduces the tax liability as a result of the sale because the gain on the sale is lower, the source said.

Element expects more than $500 million of future tax benefits from the deal, the source said.

The expected purchase price represents 1.6 times the business’ book value, the source said.

Reuters reported in October that PHH was exploring splitting up. In February, PHH said it has retained JPMorgan Chase & Co (JPM.N), Centerview Partners and the law firm Kirkland & Ellis for advice.

PHH has tried to sell itself previously.

It reached a $1.8 billion deal in March 2007 with General Electric Co (GE.N) and Blackstone Group LP (BX.N), but in January 2008 said that transaction failed after the private equity firm failed to obtain required financing as the financial crisis took hold.

Additional reporting by Cameron French in Toronto and Mike Stone in New York; Editing by Meredith Mazzilli